The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Good Evening:  The big news overnight came in the form of a stimulus package/bailout announced by China, one amounting to $586 billion, or roughly 1/5 that nation’s GDP (see below).  Overseas markets all jumped in response, as did the U.S. market at first, but a panoply of poor news from companies on this side of the Pacific eventually did in the “China rally”.  Nation after nation has now thrown interest rate cuts, stimulus packages, and bailouts at the global credit crunch thus far in 2008, but equity investors still have little to show for it.  At what point, many will wonder, will the costs start to outweigh the benefits?

Investors woke up to word that China, after taking only half-hearted stabs at its growing list of economic problems, had decided to get more serious.  Promising a “heavy hand” would swiftly push its package along (and who would doubt the authoritarian regime in Beijing on this score?), the Chinese government made an assortment of promises to address its rapidly slowing economy.  Equities, especially those in Asia, soared on the news, but the “huge stimulus” looked smaller and smaller the more analysts picked it apart (see attached).  A revamped and re-sized bailout for AIG also had investors feeling kindly toward stocks this morning, but, as with the package out of China (from where AIG, ironically enough, can trace its early roots), there was less to like the more one processed the implications.  That AIG’s massive quarterly loss necessitated a fresh $40 billion from the TARP is anything but good news (see below).  It means, contrary to the suggestion of so many pundits, that the problems facing those exposed to housing and derivatives are still not “contained” and will almost certainly lead to taxpayer losses instead of the healthy gains promised back in September.

The AIG news alone would have been enough to cut short this morning’s nascent rally, but when Fannie Mae dropped another multi-billion dollar bombshell on the markets and wondered aloud if the $100 billion promised thus far to the GSEs by U.S. taxpayers would be enough, market participants had fresh reasons to be concerned.  Also not helping the credit backdrop was a Chapter 11 filing by Circuit City.  And finally, shares of GM (which is itself seeking to be bailed out, if you’re keeping score at home) were hit when an analyst reworked the numbers on his spreadsheet and came up with a new price target — zero (see below).

This dreadful news flow simply overwhelmed the early rally in New York.  The major averages opened 2% higher and began a slide that was not interrupted until they sported losses of a similar magnitude.  A bounce followed, but when it couldn’t even manage to touch the unchanged mark from below, a bout of fresh selling saw the indexes set new lows during the final hour.  A nice pop in the final 30 minutes helped mitigate the damage, and while the Dow Transports did manage to finish with a gain of 0.65%, the Russell 2000 limped home with a 2.5% loss.  The other markets mirrored stocks when they also reversed course during the session.  Bonds were down early,  but enjoyed modest gains after a successful 3 year note auction.  The dollar opened lower, but finished just about unchanged.  Commodities weren’t quite the inverse of the greenback, but strong early gains did give way to merely decent ones by the closing bell.  The CRB index held on to a gain of 1.75%.

Given the odd juxtaposition of today’s large headlines, the question investors are now grappling with is: “Are the world’s problems too big to bail out”?  And, even if we somehow find the right combination of alphabet soup programs to prevent serious damage in the short run, what will be the long term cost to the U.S. and other nations?  One way to begin assessing the cost would be to have the Fed disclose just what our central bank has accepted to date as collateral for loans to various financial institutions (see below).  A lack of transparency may not have been at the root of the problems hitting Fannie, AIG, and GM, but more disclosure might have prevented them from becoming as serious as they now seem.

We would expect such behavior from, say, the People’s Bank of China or the BOJ, but the lines between capitalism, state-aided capitalism, and state-directed capitalism (which is the most polite term I can think of to describe socialism) have blurred in recent months.  Just less than two decades ago, we jeered Japan’s version of capitalism and sneered at China’s attempts to move away from communism.  Now it’s hard to tell the three systems apart.  When will our creditors — these same nations we used to scold, by the way — reach the conclusion that their capital is better spent at home that in the U.S.?  If China’s latest stimulus package represents a step toward doing so, then the cost of AIG, FNM, FRE, BSC, GM, and the rest will add up over time in the form of higher interest rates, inflation, or both.

-Jack McHugh

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See also:

Chinese fiscal stimulus package not as impressive as it sounds (Capital Daily)

http://www.ritholtz.com/blog/wp-content/uploads/2008/11/capital-daily-11th-nov-08.pdf

China’s $586 Billion Stimulus Boosts Stocks, Metals (Bloomberg)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ajVKL6h0rTVw

Fannie Says $100 Billion Pledge From Treasury May Not Be Enough

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.iQh4uHj3X8&

AIG Gets Expanded Bailout, Posts $24.5 Billion Loss

http://www.bloomberg.com/apps/news?pid=20601087&sid=a__sWuaTWZXw&

Circuit City, Electronics Retailer, Seeks Bankruptcy

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0Vg0XjJ_wOE&

GM Plummets After Analyst Cuts Price Target to Zero

http://www.bloomberg.com/apps/news?pid=20601087&sid=aF2FlgNCR5jg&

Fed Defies Transparency Aim in Refusal to Disclose

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahdVHk_Ccoeg&